Dutch dairy farming: finding the right balance between the long and short term
It comes just as the sector is experiencing a surge in growth and the milk price is edging up from its lowest point: Rabobank's renewed vision on dairy farming in the Netherlands. The sector has good prospects. But dairy farms do need to focus on financial buffers, lower production costs and maintaining public support in order to secure a bright future.
Dutch dairy farming and dairy products are considered leading worldwide and are the showpiece of the Dutch agriculture and horticulture industry. Rabobank is the market leader in financing the sector. Local Rabobanks had a total of more than 30 billion euros’ in outstanding loans in the total food and agri sector in 2014 and loans to the dairy farming sector accounted for more than 12 billion euros of that amount.
Marijn Dekkers is a sector manager dairy farming at Rabobank in the Netherlands. He advises customers of local Rabobanks and co-authored the Rabobank vision entitled 'Milking in balance'. We speak with him about few key developments in the sector and Rabobank’s vision on them.
Does Dutch dairy farming have good prospects?
Dekkers: ‘Absolutely, without a doubt. The sector possesses the knowledge and expertise required to remain the leading sector that it is today. Of course the sector is facing major challenges, but that was true in the past as well. Dairy farmers must go even further in making the transition from farmer to entrepreneur because there are multiple hurdles on the horizon. They range from sharply fluctuating prices to new regulations and the necessity to maintain public support. '
EU milk quotas were abolished on 1 April 2015. Dutch dairy farmers invested heavily in increasing their scale in the run-up to that date. In its new vision on the dairy sector, Rabobank emphasises the importance of public support, the environment and outdoor grazing. Are economies of scale no longer the answer to everything?
'Creating economies of scale has never been the answer to everything for the dairy sector. We’ve seen in recent years that renovating old buildings has often been accompanied by increasing scale. Investments in animal welfare and environmental measures become more affordable when you combine them with a larger number of cattle.
But more milk doesn’t necessarily mean more income for dairy farmers. It has become clearer than ever that a farm can only achieve growth providing factors of production are aligned, farmers take a responsible approach to manure and the environment and there is public support. Outdoor grazing plays an important role in this regard.
While more land can improve the balance within some farms, it’s important to remember that land is expensive. Farms that want to borrow money for that purpose will also have to have sufficient financial scope to pay the interest and principal if interest rates are higher in the future than they are today.'
'Dairy farmers must have the financial resilience to absorb sudden drops in the milk price. They can achieve this by building buffers during good times and by having clear insight into the expected cash flows at an early stage.'
Dairy is an international and competitive market. Can the Netherlands hold its own in terms of cost price?
'That’s still a major challenge. Two things are important in this respect. Firstly, milk from north-western Europe is needed to meet the international demand for dairy. Secondly, Dutch dairy farmers have a strong market position through their cooperatives and ultimately get a milk payout price that is higher than many competitors on the world market. The Netherlands sets the tone internationally in the field of quality and sustainability.
But this higher milk price compensates only partially for the higher production costs that are inextricably linked to the Dutch conditions, characterised by aspects such as expensive land, limited farm size and the costs of sustainability and quality. That’s why dairy farmers must focus on the lowest possible production costs within these conditions. There is still room for improvement at many farms. It all comes down to earning maximum returns on labour, land, cowsheds and invested capital.'
The Dutch milk price stood at more than 44 euros per 100 kilos of milk in the summer of 2014. A year later it has dropped to less than 28 euros. This has pushed down dairy farmers’ milk income by 10,000 euros a month. How should farmers handle these price fluctuations?
'These fast ups and downs are the new reality. While the market outlook for the long term is good, demand can suddenly collapse. Examples include the elimination of demand from Russia in August 2014 and later the lower demand from China. The international supply of milk is just as capricious. Drought or too much rain and low or high temperatures can all affect the growth of grass and grains and the amount of milk cows produce. Dairy farmers must have the financial resilience to absorb sudden drops in the milk price. They can achieve this by building buffers during good times and by having clear insight into the expected cash flows at an early stage. This provides peace of mind and avoids unpleasant surprises and wrong decisions.'
How does Rabobank support dairy farmers in these new times?
'Dairy farmers enter into long-term commitments, while operating profit can change substantially in the short term due to factors such as the milk price. This makes it imperative to have excellent insight into the financial position and we help farmers with this. When considering financing, we now look even more closely at whether a business will still have validity and public support in ten years’ time. Businesses with above-scores for sustainability, regarding aspects such as animal welfare, outdoor grazing, biodiversity and CO2, have better prospects for the future.
At the same time we notice that dairy farmers are reluctant to take extra steps in the field of outdoor grazing, biodiversity or greenhouse gases if they come at the expense of short-term profit.'